Fully cognizant of the fast-changing global environment and the ramifications on its business, the INTERNATIONAL ISLAMIC TRADE FINANCE CORPORATION (ITFC) in this article details how it is gearing itself to effectively deal with the prevailing challenges and its strategic direction for the future.
Key challenges in 2016
In addition to those challenges deemed to have a direct impact on the business, namely the drop in oil prices and the slump in commodities in general, there is also the challenge of a lack of clear visibility on the stability of global markets and the competitive pressure from other players moving aggressively into our niche markets (Islamic finance and structured trade finance (STF)) through alliances with specialized partners thus reducing the barriers to their entry.
2016 and beyond
The momentum for diversification gathered pace in 2015 and the ITFC succeeded in extending its trade solutions to more countries and clients. During the year, the ITFC saw its opportunities expanded with the addition of new clients to the portfolio and re-adjustment in exposures with top clients.
This in part is due to the ITFC’s strategic drive for growing field presence and client proximity, which helped improve the overall business portfolio. The ITFC started its push for regional presence in 2014; however, this got into full swing in 2015 with the relocation of client-coverage staff from its headquarters to field offices in Turkey, Indonesia, and Senegal. So far, the early result is promising as we see the investment in regional presence paying off. Overall, the ITFC is building its strength on the Regional Presence Strategy and 2016 is expected to see further expansion, resulting in more diversification and client proximity.
Overcoming challenges: Economic and political instabilities affecting trade financing in member countries
Economic and political instabilities in some of our major member countries have affected trade financing volumes in some countries. For instance, the volume of business for petroleum financing for the government of Bangladesh witnessed a sharp fall due to the IMF’s conditionality on the government of Bangladesh capping the ceiling on short-term borrowings. In addition, there is the lower wheat production outlook in Kazakhstan, affecting the Central Asia trade financing approvals in 2015. Notwithstanding this, the main driver for the Asian business has come from Turkey, following the successful launch of the ITFC’s field presence in the IDB Gateway Office in Istanbul.
Due to rapid changes in the market, there will be a shift over the coming years that will allow the ITFC to diversify its portfolio further and penetrate new markets and new countries geographically. Though the aforementioned unforeseen events unfolded beginning in 2015, they also accelerated diversification in the products and countries. Over the next three years, the ASIA/Central Asia Team is expected to strengthen its STF business in Turkey, Central Asia, Indonesia and Bangladesh. It is expected to represent around 60% of growth and the remaining increments are expected to be from the organic growth from the other regions.
The MENA/South America portfolio growth in 2016 will focus on consolidating the gains in the previous years in Egypt, Tunisia and Jordan as well as ensuring the sustainability of the newly acquired sovereign business in Djibouti, Comoros and Suriname.
It is worth noting that the MENA region has made a quantum leap in its business since 2014 whereby the volume grew by over 50% in one year, pushing the region to have a bigger slice of the ITFC portfolio of around 44%, up from the traditional 28% that was prevailing in the previous years. The challenge, however, will be to maintain and grow that percentage.
The ITFC’s financing for sub-Saharan Africa (SSA) witnessed stellar growth over the past two years with the portfolio nearly doubling. The ITFC revamped the team managing the SSA portfolio and added new headcount, which led to a significant scaling up of the business. Overall, in 2015, the ITFC was able to consolidate its SSA portfolio as well as add new sovereign deals from countries in West Africa while growing its portfolio in Nigeria. As we move into 2016, a renewed focus will be on Eastern Africa, where the portfolio needs a push with deals expected to be structured transactions covering commodities such as petroleum, rice, fertilizers and agro products. African economies are witnessing strong growth with seven out of the ten fastest-growing economies being from Africa. This offers the ITFC enormous opportunity for growth and expansion while fulfilling its mandate of contributing to economic and social development through the provision of trade.
Private sector development
The only way for member countries to achieve sustainable economic development is through the development of a vibrant private sector. A strong private sector will lead to a diversified economy which will be better equipped to absorb shocks and minimize the effect of downturns which are becoming more frequent, the recent drop in oil prices being a case in point.
The ITFC will continue to pursue a strategy of increasing its financing portfolio to the private sector while at the same time ensuring that the quality of the portfolio remains sound, underpinned by the use of innovative and secure financing structures. It is the ITFC’s objective to encourage interaction with private sector players to assist member countries to have access to private and public funds, including access to financial markets for the purpose of financing trade.
Enhancing access to finance for SMEs in member countries
SMEs are major contributors to the economic development in member countries particularly as they relate to job creation and revenue generation. This is even more so for emerging and developing countries. In the least developed member countries (LDMCs), SMEs face the daunting challenge of securing access to financing, a huge constraint to growing their business. A number of studies have revealed the huge financing gap facing SMEs. Experts indicate that the key obstacle hindering SMEs, particularly in LDMCs, is their inability to access working capital and trade finance. According to studies by industry experts, sub-Saharan Africa alone has registered a financing gap estimated at US$100 billion.
ITFC instruments for reaching out to SMEs are primarily through partnership with local and regional banks by extending fully funded lines of financing. The ITFC shall be more confident to increase its support to SMEs and given its growing geographic footprint, it shall be able to reach and serve more SMEs in various member countries. In recent years, this portfolio has expanded, reflecting the ITFC’s renewed focus on supporting SMEs to gain access to adequate financing, particularly in member countries in Africa and Asia/Central Asia.
Over the next three years, support to SMEs will be one of the key pillars in the ITFC’s strategy. This will not only help member countries achieve a balanced economic development and job creation, but with the ability to extend euro-denominated financing operations to cater to the private sector in certain geographical areas where our financing will be a catalyst filling the gap created by the departure of traditional commercial financiers.
Leveraging customized solutions: Using STF to support the private sector
Several international banks have re-tapped the STF markets in recent years, putting the ITFC in face-to-face competition over clients in some instances. The ITFC will not only work toward maintaining its role as a major STF player, but will also entrench itself as a global leader in this field.
Currently, the ITFC uses STF to provide financing mainly to private sector companies in all three regions, namely Asia/CIS, MENA, and Africa. The ITFC envisages growing this product in the coming years and it will serve as the main instrument to reach private sector companies in member countries. The commodities financed include strategic commodities such as petroleum and agro products. Using STF, the ITFC plans to expand into new commodities as well as add new companies in new markets. This will create a win-win solution whereby the ITFC will be able to extend its reach to the private sector and grow its business while at the same time maintaining a healthy portfolio with secured financing. It will help the ITFC fulfill its mandate of supporting the private sector while contributing to diversification and reducing the trade finance portfolio risk profile.
Conclusion
In line with the overall strategic direction, the ITFC will continue to cater to the needs of the public sector in member countries by financing trade for major commodities imported.
The ITFC will continue to make a push to grow its 2-Step Murabahah Financing and Line of Finance to serve the SME sector, while employing innovative solutions such as STF to provide financing to players in the private sector.
This article was contributed by the International Islamic Trade Finance Corporation.
International Islamic Trade Finance Corporation (ITFC)
Member of Islamic Development Bank Group
P.O. Box 55335, Jeddah 21534
Kingdom of Saudi Arabia
Tel: +966 12 636 1400
Website: www.itfc-idb.org